Consumers using debt management firms are being charged upfront fees for services before they are provided to increase their commitment, a report from the Australian Securities and Investments Commission (ASIC) reveals.
The report, which combined data from a qualitative analysis and mystery shop of debt management firms by BIS Shrapnel Pty Ltd, and an ombudsman survey data and analysis found there was an increasing number of small firms entering the market.
The Paying to get out of debt or clear your record: the promise of debt management firms report, found that barriers to entry for firms providing debt management services were low.
“Firms are not required to satisfy threshold requirements (such as ‘fit or proper’ persons tests ), satisfy competence standards, meet conduct or disclosure obligations, manage conflicts of interest or belong to an EDR (external disputes resolution) scheme to resolve consumer complaints,” the report said.
ASIC deputy chairman, Peter Kell, said it was crucial that clients understand what they are getting and how much it will cost, when they are considering using a debt management firm.
“The promise is always more prominent than the price”, he said.
“It is hard to find information about fees and they tend to be high, front loaded, and not refunded if the promise isn’t delivered.
“It’s also important for consumers to understand that they have alternatives to the use of such firms that may be free of charge, such as financial counselling services.
“Many stakeholders have raised concerns with ASIC and other regulators about potential harms posed by firms that may provide unsuitable services, act in ways not in the best interests of clients, or at worst, engage in predatory conduct leaving the consumer worse off.”
Findings – qualitative analysis and mystery shop:
- fees and costs were opaque making it difficult for consumers, often in significant financial hardship, to assess the cost relative to the purported value;
- fees were often ‘front loaded’ — that is, fees were payable before services were provided thereby increasing consumer commitment through sunk costs;
- some sales techniques create a high-pressure sales environment; and
- little information was given about important risks and some firms had a poor understanding of the relevant law and the consequences of particular strategies which may lead to unsuitable services for consumers.
Findings – Ombudsman survey data and analysis:
- a growing number of firms are representing consumers at external dispute resolution (EDR)—this is concentrated among a few large players, with an increasing number of small firms entering the market;
- the disputes brought to EDR schemes by debt management firms relate almost exclusively to arguments about the removal of default listings on consumer credit reports (despite the breadth of other issues that can arise for indebted consumers);
- while an increasing number of consumers are being represented at EDR by debt management firms, this is not leading to more credit reporting related disputes being found in favour of consumers.
